Daily Insight:ORD Daily Insight

Daily Insight:ORD Daily Insight

Last week, we attended the 15th Chinajoy event in Shanghai. NetEase
displayed over 50onlinegames, and offered trials for games that have not
been commercialised yet, such as PC gameWar Rage and mobile game
Indentity 5. We note flagship mobile titles slipped a few places
inrankings in 2Q17, while PC titles lacked new expansion packs. However,
the company’s ecommercesegment performed well during the “618” online
shopping promotion on 18June.

    We anticipate revenue of Rmb13.1bn in 2Q17(-3.8% QoQ), with diluted
net income perAmerican depositary share (ADS) of Rmb25.22. We maintain
our diluted EPS forecasts ofRmb106.65in 17E (+21.6% YoY), Rmb120.70in
18E (+13.2% YoY), and Rmb138.27in 19E(+14.6% YoY). We maintain our
target price of US$380and, with 27.0% upside, maintain ourBUY rating.

    Extensive game pipeline. During the Chinajoy event, NetEase
presented multiple mobiletitles that were announced on the company’s
“520Game Enthusiasts’ Day” in May 2017,including Novoland and Indentity

  1. Both games featured uniqueness in graphics andgameplay. Based on our
    own testing, we note that some of the games that were displayed areclose
    to their final version, extending NetEase’s mobile game portfolio in
    2H17. Two of themost anticipated PC games were also exhibited at the
    event. In War Rage, players can enjoythe experience of fighting with
    thousands of soldiers on the battle field, while Open Range is aromantic
    oriental fantasy massively multiplayer online game (MMO), based on Wen
    Runan’sfamous Wuxia novel. The second round of testing is to be
    announced for both games. Besides,Blizzard game exhibition area
    attracted a large number of loyal players, while new contentand updates
    were announced for five games licenced by NetEase.

    Earnings preview: 2Q17. Looking at mobile games in 2Q17, Fantasy
Westward Journeyremained ranked second on iOS while the other three key
titles saw a slight drop in rankingcompared to 1Q17. Fantasy Westward
Journey and Westward Journey Online enjoyed positivegrowth in time
spent, while Onmyoji’s dropped by over 10%. Several flagship PC
gamesintroduced expansion packs. We expect online game revenue to reach
Rmb10.2bn (-4.9%QoQ). The online advertising industry recovered after a
low season in e-commerce during thefirst quarter of the year. We note
NetEase News ranked third among news applications, with16% QoQ growth in
time spent. We expect online advertising revenue to reach
Rmb0.6bn(+40.4% QoQ). The e-commerce segment performed very well in
2Q17. Kaola expanded itspartnership portfolio in Europe and Australia,
and achieved over 500% YoY growth duringthe “618” online shopping
promotion, while Yanxuan’s stock keeping units (SKUs) grew toover 6,000.
As Duobao discontinued, we expect e-commerce revenue to reach Rmb2.3bn
(-7.2% QoQ). We forecast total revenue will reach Rmb13.1bn in
2Q17(-3.8% QoQ). Given theonline game segment’s lower revenue
contribution in 2Q17and the e-commerce segment’shigher revenue
contribution over the same period, we expect gross margin to decrease
by1.7ppts, and net profit to reach Rmb3.3bn.

    Maintain BUY. NetEase released a new expansion pack for PC game
Fantasy WestwardJourney Online in July. With other new PC and mobile
games expected to start new rounds oftesting in 2H17, we maintain our
diluted EPS forecasts of Rmb106.65in 17E (+21.6% YoY),Rmb120.70in 18E
(+13.2% YoY), and Rmb138.27in 19E (14.6% YoY). We maintain ourtarget
price of US$380and, with 27.0% upside, maintain our BUY rating.